Benefits

Why Your Employer May Drop Your Health-Care Plan

No one can predict how many employers will drop health-care coverage in 2014, when the bulk of the Affordable Care Act takes effect. If workers can get affordable health plans on their own next year, though, many more companies may feel it’s safe to stop offering company health benefits in the years that follow.

Companies see 2014 as an experiment to watch. “What we’re hearing is larger businesses are going to stand back,” says Robert Hurley, senior vice president for sales and operations at online health insurance marketplace eHealth (EHTH). “Even the small businesses will wait and see.”

Fear of backlash from workers keeps many employers from dropping coverage, as Bloomberg reported in December. Tax deductions for health spending also encourage businesses to keep offering benefits. Still, while few admit it publicly, many American companies would love get out of the health insurance business. For employers, providing health insurance is expensive and the cost increases are unpredictable. Their competitors in most other wealthy nations don’t have to bear the same costs: That’s usually the government’s job.

Prognosticators have long predicted that Obamacare would drive companies from the group health-care market en masse. The argument never made sense on its face. Companies aren’t required to offer health care now. Many do anyway to attract workers. Why would they drop it precisely as penalties for not offering coverage kick in?

One reason is that even companies that provide health benefits can face fines under the law if their plans cost workers too much or don’t provide sufficient coverage. Employers in that situation might drop out rather than buy more expensive policies that meet the law’s standards.

A Deloitte study last year suggested 10 percent of employers would stop offering group health plans. A widely criticized McKinsey report from 2011 put the number as high as one-third. The Congressional Budget Office’s latest projections suggest 8 million fewer people will be covered by employer plans five years from now under the ACA than without it. Many of them will get policies through health insurance exchanges instead. (On balance, CBO projects that the law will expand coverage to 27 million of the 58 million people who don’t have health insurance today.)

Companies that drop coverage and let workers fend for themselves risk alienating staff. Small businesses in particular, eHealth’s Hurley says, often feel a moral obligation to provide health care. That equation might shift, though, if the ACA’s reforms help individuals find affordable policies on their own. (That’s a big if.) Employers could turn what they pay for health premiums now into cash compensation instead—a predictable cost they would be able to control. (Companies that pair high-deductible health plans with contributions to workers’ health savings accounts have already taken a step in this direction.)

Don’t expect too many businesses to make that move in 2014. But if the ones that do aren’t seen as sending workers into the wilderness, more will surely follow.